INFLATION & ITS IMPACT

ON PAKISTAN ECONOMY

Group Members:
Muhammad Ammar Hanif
Ammara
Hamza
Rafih

Shaukat

saleem

Jamal

Usman Arshad

INFLATION:

Inflation is a situation whereby there is a continuous and persistent rise in the general
price level.

Inflation is the rise in the prices of goods and services in an economy over a period of
time. When the general price level rises, each unit of the functional currency buys
fewer goods and services; consequently, inflation is a decline in the real value of
money a loss of purchasing power in the internal medium of exchange, which is also
the monetary unit of account in an economy.

TYPES OF INFLATION:

Demand pull inflation:

This occurs when the economy grows quickly and starts to

overheat Aggregate demand (AD) will be increasing faster than aggregate supply
(LRAS).

Cost push inflation:

This occurs when there is a rise in the price of raw materials, higher

taxes, etc.

Other different types of inflation:

Creeping inflation.

Walking inflation.

Galloping inflation.

Hyperinflation.

Stagflation.

Deflation.

Wage inflation.

Asset inflation.

Asset inflation-Gas.

Walking Inflation:

This type of strong, or pernicious, inflation is between 3-10% a year. It is harmful to

the economy because it heats up economic growth too fast. People start to buy more
than they need, just to avoid tomorrow's much higher prices. This drives demand even
further, so that suppliers can't keep up. More important, neither can wages. As a result,
common goods and services are priced out of the reach of most people.

Galloping Inflation:

When inflation rises to ten percent or greater, it wreaks absolute havoc on the economy.
Money loses value so fast that business and employee income can't keep up with costs
and prices. Foreign investors avoid the country, depriving it of needed capital. The
economy becomes unstable, and government leaders lose credibility. Galloping
inflation must be prevented.

Hyperinflation:

Hyperinflation is when the prices of most goods and services skyrocket, usually more
than 50% a month. It usually starts when a country's Federal government begins
printing money to pay for fiscal spending. As the money supply increases, prices creep
up as in regular inflation.

Stagflation:

Stagflation is just like its name says: when economic growth is stagnant, but there still
is price inflation. This seems contradictory, if not impossible. Why would prices go up
when there isn't enough demand to stoke economic growth? It happened in the 1970s
when the U.S. went off the gold standard. Once the dollar's value was no longer tied to
gold, the number of dollars in circulation skyrocketed. This increase in the money
supply was one of the causes of inflation. Stagflation didn't end until then-Federal
Reserve Chairman Paul Volcker raised the Fed funds rate to the double-digits -- and
kept it there long enough to dispel expectations of further inflation. Because it was such
an unusual situation, it probably won't happen again.

Deflation:

Deflation is when asset and consumer prices continue to fall. This may seem like a
great thing for shoppers, except that the cause of widespread deflation is a long-term
drop in demand. That means that a recession is probably already underway, with job
losses, declining wages, and an ongoing decline in the value of your home and your
stock portfolio. This aggravates deflation because businesses lower prices in a
desperate attempt to get people to buy their products.

Creeping inflation:
Creeping or mild inflation is when prices rise 3% a year or less. According
to the U.S. Federal Reserve, when prices rise 2% or less, it's actually
beneficial to economic growth. That's because this mild inflation sets
expectations that prices will continue to rise. As a result, it sparks increased
demand as consumers decide to buy now before prices rise in the future. By
increasing demand,
mild inflation drives
economic
expansion.

Wage inflation:
Wage

inflation is when workers' pay rises faster than the cost of living. This occurs when
there is a shortage of workers, when labor unions negotiate ever-higher wages, or when
workers effectively control their own pay. A worker shortage occurs whenever
unemployment is below 4%. Labor unions negotiated higher pay for auto workers in the
90s. CEOs effectively control their own pay by sitting on many corporate boards,
especially their own. All of these situations created wage inflation. Of course, everyone
thinks their wage increases are justified. However, higher wages are one element of
cost-push inflation, and can cause prices of the company's goods and services to rise.

Asset Inflation:

An asset bubble, or asset inflation, occurs in one asset class, such as housing, oil or
gold. It is often overlooked by the Federal Reserve and other inflation-watchers when
the overall rate of inflation is low. However, as we saw in the subprime mortgage crisis
and subsequent global financial crisis, asset inflation can be very damaging if left
unchecked.

Asset Inflation Gas:

Gas prices rise each spring in anticipation of the summertime vacation driving season.
In fact, you can expect gas prices to rise ten cents per gallon each spring. However,
political uncertainty in the oil-exporting countries drove gas prices higher in 2011 and
2012. Prices hit an all-time peak of $4.17 in July 2008, thanks to economic uncertainty.

Economist view on inflation:

It has been generally agreed by the economists that high rates of inflation and
hyperinflation are caused by an excessive growth in the supply of money.

Today, most economists favor a low steady rate of inflation. Low (as opposed to zero
or negative) inflation may reduce the severity of economic recessions by enabling the
labor market to adjust more quickly in a downturn, and reduce the risk that a liquidity
trap prevents monetary policy from stabilizing the economy.

The task of keeping the rate of inflation low and stable is usually given to monetary
authorities. Generally, these monetary authorities are the central banks that control the
size of the money supply through the setting of interest rates, through open market
operations, and through the setting of banking reserve requirements.

Causes of inflation in Pakistan:

inflation can happen when governments print an excess of money to deal with a crisis.

When any extra money is created, it will increase some societal groups buying power.

Shortages are then created and merchants lose business.

a rise in production costs.

rising labor costs can also lead to inflation.

international lending and national debts.

A deep drop of the exchange rate can also result in inflation.

inflation can also be caused by federal taxes put on consumer products.

Other Inflation causes:

By increase in demand & decrease in supply:
1.

Increase in demand:

increase in money supply.

if there is an increase in the velocity of circulation of money it also leads to inflation.

More investment.

Government of Pakistan has to make a lot of non-productive expenditures like defense etc.

Deficit financing is another cause of inflation.

Increase in foreign remittances is increasing the money supply in our country.

Foreign aids are also a source of mobilization of resources form rich countries to poor countries.

Due to demonstration effect people of our country want to copy the styles of people of rich countries.

Population of Pakistan is increasing day by day. Increasing population is demanding more and it creates
inflation.

Other Inflation causes: (Cont.)

2. Decrease in supply:

Low growth rate of agricultural sector caused in shortage of productivity. It results in low supply and increase in
price level.

Our industrial sector is not at developed form due to use of backward techniques of production. Its less
production also creates shortage in market and caused in inflation.

more wages and salaries there is an increase in income and it caused in inflation.

Increase in the prices of imports also leads to creation of inflation.

The value of our currency is decreased due to devaluation. It makes imported goods more expensive and it leads
to shortage of supply.

The imposition of indirect taxes is a reason for increase in prices.

Effect of inflation in Pakistan Economy:

The most immediate effects of inflation are the decreased purchasing power of the rupee
and its depreciation.

Depreciation is especially hard on retired people with fixed incomes, as spending power
decreases each month. Those not on fixed incomes are more able to cope, because they
can simply increase their income.

Another destabilizing effect of inflation is that some people choose to speculate heavily in
an attempt to take advantage of the higher price level. Because some of the purchases are
high-risk investments, spending is diverted from the normal channels and some structural
unemployment may take place. Finally, inflation alters the distribution of income.

Lenders are generally hurt more than borrowers during long inflationary periods, which
mean that loans made earlier are repaid later in inflated rupees. Inflation weakens the
function of money as storage of value, because each unit of money is worth less with the
passing of time. The progressive loss of the value of money during a period of inflation
makes the borrowers to be less willing to use the money as standard differed payments.

Effect of inflation in Pakistan Economy:

(Cont.)
Following are GOOD EFFECTS of inflation, if rate is 2% to 4%:

1)

There is increase in production due to inflation.

2)

Inflation increases the employment opportunities in the country.

3)

Inflation enhances the process of economic development.

4)

There is more investment in country at the time of inflation.

5)

Inflation increases the economic activities that may cause to inventions and innovations.

6)

Profit of the producers also increases when there is normal inflation.

Effect of inflation in Pakistan Economy:

(Cont.)
Following are the BAD EFFECTS of inflation:

1)

It is a huge problem for employees, taking fixed salaries.

2)

It generates unfair distribution of income and wealth.

3)

Inflation reduces the saving of the population.

4)

It is a cause of unfavorable balance of trade and payment.

5)

Inflation increases the rate of interest.

6)

It creates a lot of social evils.

7)

It is difficult for consumers to purchases more goods.

8)

It generates very bad effects on the poor labor force.

9)

Inflation reduces the living standard and purchasing power of people.

10)

It is harmful for creditors.

11) Inflation reduces the purchasing power.

Measures taken to control the inflation in

Pakistan:

The inflation was well under control from the fiscal year 2000 to 2004. However, it
shoots up to 9.3% in the year 2005 mainly due to the rise in support price of wheat and
a surge in international price of oil.

Measures taken to control the inflation in

Pakistan: (Cont.)
The Government of Pakistan being well aware of the adverse effect of inflation is taking following
measures to bring down the inflationary pressure in the economy.

Increase in the supply of essential goods.

Establishment of high level committee.

Rise in the price of oil.

Tightening Monetary policy.

Import of Wheat.

Supply of flour and other items of utility through Utility Stores.

Pakistan Core Inflation Rate 2010-2016:

Core Inflation Rate in Pakistan increased 4.40 percent in April of 2016 over the same month in the
previous year. Core Inflation Rate in Pakistan averaged 8.13 percent from 2010 until 2016,
reaching an all time high of 11.40 percent in June of 2012 and a record low of 3.40 percent in
September of 2015. Core Inflation Rate in Pakistan is reported by the State Bank of Pakistan.

Actual

Previous

Highest

Lowest

Dates

Unit

4.40

4.70

11.40

3.40

2010 - 2016 percent

Frequency

Monthly

Conclusion:

In Pakistan the general price level is persistently rising since its establishment.

The prices remained volatile during the decade of 1990s ranging from 5.7 % to 13 %
mainly because of declining economic growth, expansionary prices, output set backs,
higher taxes and a depreciation of Pakistan rupee.

The inflation rate started declining from 1998 onward due to improved supply position
of goods and strict budgetary measures. The inflation rate was 5.7 % in 1998-99.

It was brought down to 3.6 % in 1999-2000 and further to 3.1 % in 2002-2003.

The inflation rate based on CPI (Consumer Price Index) has averaged 4.6 % during
2003-2004. The slight rise in prices was due to increase in price of wheat. The inflation
rate reached as high as 9.3% in the year 2004-2005 mainly due to rise in price of wheat
and increase in the international oil price.